Question

Define and explain tax credits and tax deductions and give at least 4 examples of for each.

Answer 1

Tax Deduction is an amount which is available to a taxpayer to be deducted from Income.

Examples:-

1. Standard Deduction
2. Itemized Deduction – Property Tax, Real Estate Tax etc.
3. Student Loan Interest
4. Medical and Dental Expense

Tax Credit is an amount which is available to a taxpayer to be deducted from Tax Payable. Tax credits are deducted directly from Tax Payable while Tax Deductions are deducted from Income.

Examples:-         

1. Child and Dependent Care Credit
2. Credit for the Elderly or disabled.
3. Foreign Tax Credit
4. Health Coverage Tax Credit